by T. GormanPosted on Posted in SECActions

Introduction – an overview of 2022

This article provides a brief overview of 2022 and is the last in a series of analyzing on a quarter basis the enforcement results of the SEC. While 2021 may have been marked, and perhaps hindered by the pandemic, that clearly was not the case in 2022 for SEC Enforcement. To be sure, few people are at the offices of the agency. Even Chair Gensler frequently appears on television from his Baltimore home rather than the Commission’s headquarters office in Washington DC. Testimony continues to be largely taken by remote, although that seems to be drawing to an end.

Nevertheless, the agency filed nearly 500 new enforcement cases in 2022, far more than in recent calendar years, according to our count What is perhaps more interesting is the variety of cases that were filed. While staples such as offering fraud actions and insider trading cases continue to be key, the percentage of those traditional actions of the overall number of enforcement actions filed dwindled last year.

In 2022 the universe of cases can be characterized as a “Cop on Every Corner” as reflected in the wide variety of cases filed. No matter the vantage point one assumes to assess market activity, it it is clear that SEC Enforcement was monitoring the activity. The range of cases filed, aside from traditional staples like offering fraud, insider trading and manipulation, has a broad reach from AML, FCPA, free riding, privacy and touting to SPACs and Reg FD. In many instances that reach may be the result, at least in part, of data analytics – a factor cited by the agency in announcing two new insider trading cases last year. Many observers believe the Commission may have the best data analytics team in Government.

Whatever the predicate for the increased number of enforcement actions and the broad reach of the enforcement program, there is no doubt it is good enforcement. The image of a “Cop on Every Corner” or perhaps more appropriately an SEC Enforcement Official monitoring each nook and cranny of the market place, should give comfort to all investors – the Commission is making the market safer and more efficient for all participants.

Statistics for 4Q22

In the fourth quarter of 2022 a total of 143 new enforcement actions were filed. The majority – 84 –were civil injunctive actions. While the pace of new filings slowed during the beginning of the quarter – a fact undoubtedly attributed to the huge “push” the agency makes every year as the Government fiscal year comes to an end on September 30, over the course of the quarter it increased. The statistics for the period are as follows:

4Q22 – cases filed (expressed as percentage of total)

Offering fraud 13%

Crypto assets 9%

Manipulation    9% 

Insider trading   7%

Two points stand out regarding these statistics. First, the four categories listed above reflect the largest groups of case initiated during the quarter. Yet only one of the categories is in double digits – offering frauds which is frequently one of the largest groups of cases for any period. The fact that the percentage of the total for the other three largest groups of cases filed in the fourth quarter is a reflection of the fact that the agency filed a variety of cases during the period which often probed little know corners of the market place. This is consistent with the approach taken by the agency since shortly after Mr. Gensler became Chair of the Commission.

A brief review of the cases cited in subsequent installments of this series confirms this point. During the fourth quarter of 2022 cases brought in areas outside those cited above included touting, financial fraud, free riding, unregistered securities, unregistered brokers and others. This broad reach approach can be very effective in monitoring the market as discussed above.

Second, the fact that crypto assets are the second largest category of cases is significant. While there has been an on-going debate regarding the regulation of those assets, it seems clear that the Commission is not waiting for Congress to act. Rather, the agency added a number of new enforcement positions which focus on crypto assets and is filing significant numbers of cases, a fact consistent with Chair Gensler’s statements that many crypto assets are in fact securities.

These results also undercut claims that the “rules” for determining what crypto assets may be securities are some how unclear. Indeed, most of the crypto asst cases filed are based on Securities Act Section 5 – a statute passed in 1933 – and the Supreme Court’s decision in SEC v. Howey, 328 U.S. 293, a case decided decades ago in 1946. Clearly the statute and the case have each been on the books for years and reviewed, interpreted and construed by untold numbers of courts over the decades. Stated differently, there is plenty of precedent to review and analyze the standards being applied to crypto assets.

Finally, this is the first of four Parts of the article. Section II provides examples of the cases brought in each of the four largest categories cited above; Section III provides examples of other significant cases filed during the quarter (and will be published in two parts because of its length); and Section IV is the Conclusion to the series. Earlier articles in this series analyzing each of th quarters of 2022 can be found at: 1Q22, here; 2Q22, here, and 3Q 22 here.

 Next: Examples of cases in each of the largest categories for the quarter  

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by T. GormanPosted on Posted in SECActions

The pace of filing new enforcement actions seemed to slow last week. Only two new actions were announced. One involved conflicts and an investment adviser. The other centered on claims tied to crypto assets.

Be careful; be safe this week.

SEC

Reopen comment period: The Commission reopened the comment period for proposed amendments to Exchange Act Rule 3b-16, which concerns the definition of an Exchange. The period will close on June 13, 2023. The proposal reiterates its position that the definition applies to platforms that trade crypto asset securities, including DeFi systems (here).

Accounting Issues & Class Actions

Report: Cornerstone Research recently published a report focused on accounting cases in the class action area which often link to SEC enforcement actions, titled Accounting Class Action Filings & Settlements 2022, Review and Analysis. (here). The Report notes that in 2022 the number of accounting class actions filed increased to 51 compared to 46 filed in the prior year. As the same time, the number of non-accounting class actions decreased last year. It also notes that while the number of cases filed last year increased, 24% of those actions were tied to SPACs. Cornerstone also found that about 35% of the cases filed in 2022 were tied to GAAP revenue issues while 33% of the cases filed last year were based on restatements.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 1 civil injunctive case and 1 administrative proceeding, excluding 12j and tag-along proceedings as well as those presenting conflicts for the author (which are counted in totals).

Conflicts: In the Matter of Corvex Management LP, 3-21369 (April 14, 2023) is a proceeding which names the registered investment adviser as a respondent. The Order alleges that the adviser failed to make timely disclosure of conflicts arising from SPACs with which it was affiliated and implement reasonably designed compliance policies and procedures. Those relationships arose from investments by Corvex personnel’s ownership interests in SPAC sponsors and Corvex’s practice of investing client assets in PIPE transactions in connection with the business combinations of affiliated SPACs. The Order alleges violations of Advisers Act Sections 206(2) and 206(4). The firm consented to the entry of a cease-and-desist order and a censure in resolving the matter. It also agreed to pay a penalty of $1 million.

Financial Fraud: SEC v Jarra. Civil Action No. 15-cv-00368 (D. Del.) is a previously filed action which named as defendants three executives of Wilmington Trust. On April 10, 2023, the Court entered a final judgement against William North, former Chief Credit Officer of the financial institution. The 2015 complaint alleged that the firm made misleading statements and omissions about its loan portfolio by underreporting its real estate loans that were 90 days or more delinquent. False statements regarding the portfolio were also made, according to the complaint. It alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the matter, Defendant North consented to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay a penalty in the amount of $10,000. The settlement concludes the litigation. See Lit. Rel. No. 25691 (April 11, 2023).

Financial fraud: SEC v. Peavler, Civil Action No. 1:19-cv-04804 (S.D. Ind.) is a previously filed action which named as defendants Bobby Peavler and William Meek, formerly executives at Celadon Group, Inc. The complaint also alleged that Defendants participated in a scheme in 2016 to buy and sell trucks at significantly inflated prices. The scheme was designed to conceal the fact that Celadron had failed to properly write down the values of trucks owned by the company. The complaint alleged that the executives lied to the auditors. The complaint alleged violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13b(2)(B) and the related rules. To resolve the matter each executive consented to the entry of permanent injunctions based on the provisions cite in the complaint and to a bar order precluding them from serving as an officer/director of a public company. Each Defendant will also pay a penalty of $50,000. See Lit. Rel. No. 25690 (April 10, 2023).

Crypto – fraud: SEC v. Terraform Labs PTE LTD, Civil Action No. 1:23-cv-01346 (S.D.N.Y. Filed February 16, 2023) is an action which names as defendants the firm, a private Singapore entity, and Do Hyeong Kwon, a resident of Koreas and Singapore who was the ultimate decision maker for Terraform during the period. Defendants marketed crypto assets in the U.S. and the world beginning by 2018. A variety of coins were involved. Defendants claimed by April 2022 that one of Terrform’s crypto asset securities – the LUNA – had a market value among the ten highest in the world for crypto and that its “stable” coin had a one-to-one peg with the U.S. dollar because of a claimed algorithm coded into the blockchain. Defendants also told investors that a popular Korean electronic mobile payment application known as “Chai”, used the Terraform blockchain to process and settle commercial transactions. The claims were not true. Likewise, the claims that the so-called stable coin – the UST — was pegged to the U.S. dollar and paid interest up to 20% through the Anchor Protocol were also false. The first time the coin began to fall in value Defendants arranged for it to be artificially propped up. The second time they did not; it crashed. Some U.S. institutional investors lost billions of dollars in market value of their LUNA and UST holdings. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 5(e) and 17(a) and Exchange Act Sections 10(b), 6(1) and 20(a). The case is pending. See Lit. Rel. No. 25692 (April 13, 2023).

ESMA

Consultation: The European Securities and Markets Authority announced on April 4, 2023 that it is one of three European regulators proposing amendments to the Delegated Regulation of the Sustainable Finance Disclosure Regulation. The proposals are designed to update the regulators’ prior position (here).

Hong Kong

Consultation: The Securities and Futures Commission of Hong Kong announced its support for a public consultation issued by the Stock Exchange of Hong Kong on proposed climate related reporting requirements for Hong Kong listed companies, according to an April 14, 2023 release (here).

Remarks: Keith Choy, Interim Head, Intermediaries, delivered the Keynote Speech at Hong Kong Web3 Festival 2023 on April 12, 2023 (here). His remarks focused on tech innovation and its impact.

Singapore

Policy statement: The Monetary Authority of Singapore or MAS issued its Monetary Policy Statement – April 2023 on April 14, 2023 (here). It discusses monetary policy going forward.

U.K

Announcement: The Financial Conduct Authority announced on April 11, 2023 that it is one of 13 regulators taking part in the Global Financial Innovation Network’s (GFIN) first ever Greenwashing TechSprint. (here). The GFIN is a group of 80 international organizations committed to supporting financial innovation in the interest of consumers (here).

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